Bank of Canada Cuts its Main Interest Rate

January 21, 2015

Canada’s overnight money rate target was cut by 25 basis points to 0.75%.  Officials acknowledged some undesirable yet unavoidable surprise to markets in this decision, which is a response to an unambiguously negative impact on Canada of the recent plunge in oil prices.  Today’s rate change was the first since the third of three 25-basis point hikes in June, July and September of 2010.  Officials released a statement explaining today’s decision and accompanied such with its regularly scheduled quarterly Monetary Policy Report.  The two documents revised down projected 2015 growth in Canada to 2.1% from around 2.5% projected three months ago.  Growth in the first half of 2015 will likely be only 1.5% and cause the output gap to widen somewhat.  Fully employed capacity is not expected to be reached until the end of 2016.  In the previous quarterly review, officials assumed this would happen sometime in the second half of next year.  A big revision has been made to projected on-year total CPI inflation, which now officials see following a path of 0.5% this quarter, then 0.3% in 2Q15, 0.5% in 3Q15, 1.2% in the final quarter of 2015, 1.9% over the following three quarters, and finally hitting 2.0% in the last quarter of 2016.  Core CPI is expected to range between 1.8% and 1.9% from 2Q15 to 3Q16 before edging up to the targeted 2.0% in the final quarter of the policy horizon.  The forecasts assume oil averages $60 per barrel during the period and pencil in trade-weighted global growth of 3.4% this year and 3.5% in 2016, which are unchanged from assumptions made in the last Monetary Policy ReportOfficials note that up to the oil price plunge, Canada was experiencing “solid and more broadly-based economic growth, and characterize today’s rate cut as insurance against downside risks to core inflation and the ability of households to service their debt caused by the steep decline in oil prices.

Copyright 2014, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.

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